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Themes Period Organization Pub Date Countries Industry : Operational Restructuring : 1980 - 2002 : TISCO : 2002 : India : Steel
. the steel industry is not likely to return the cost of capital.B." "We realize that however efficient we become. TISCO.3 per cent every year. a company like TISCO may be the last one standing. Managing Director. Paribas Asia Equity." . This is no fault of ours.Rajeev Das."With cost-cutting measures and good management.5 . Muthuraman. but due to the structure of the global and Indian steel industry." . Analyst. "It is our endeavor to reduce the cost of saleable steel by 2.
construction bars. By early 2000. . This view point is based on a variety of reasons such as low operating costs. TISCO initiated a modernization program of its steel plant (See Exhibit II). West Bokaro Collieries. Joda East Iron Mines. forging quality steel. tubes. software for process controls. our weakest link. India. The fifth phase of the program had commenced in April 2000 (See Exhibit III). By April 2001. Sukinda Chromite Mines. in a report stated. We realized this and embarked on the four phases of modernization. TISCO had become India's most cost-effective steel plant. In the early 1980s. Joda. the then managing director of TISCO said. Explaining the need of modernization.the only in India . The company had invested Rs 4 billion on consultancy fees during 1990 to 2000. ferro alloys and other minerals. Ferro Alloy Plant. strips and bearings. We would have been annihilated had we not modernized. The company's cost per tonne of finished steel stood at $152 for the financial year ending March 2001. structurals. The World Steel Dynamics (WSD)6. eight divisions of Tata Steel were ISO-140014 certified. Tubes Division. "Tata Steel is a 'world class' steel maker .. you cannot fight a modern-day war with weapons of the Mahabharata.Background Note: Tata Iron and Steel Company (TISCO) was established in 1907 by J N Tata1 at Jamshedpur in Bihar. By 2000. It also became Asia's first and India's largest. We addressed our drawbacks like the steel making process. integrated steel producer (ISP)3 in the private sector. and offered cargo-handling services. and Growth Shop & Steel Works. TISCO had emerged as the world's lowest cost producer of steel. "We would have been finished otherwise. It also manufactured material handling equipment.and one of the few companies in the world with such a standing. TISCO had completed four phases of the modernization programme with an investment of about Rs 60 billion5. TISCO offered a wide range of products (See Exhibit I) and services including Hot rolled/Cold rolled (HR/CR) coils2 and sheets." By mid-1990s.. TISCO's operating cost at the 'hot metal' (liquid) stage was $75 per tonne.. including Noamundi Iron Operations. J J Irani. rods.
Analysts felt that TISCO's achievement of becoming the lowest cost producer of steel was mostly attributed to its implementation of TOP (Total Operational Performance). a program that focused on improving TISCO's operational practices and rationalizing procurement costs. etc. Company TISCO Usinor (Russia) Posco (Korea) CSN (Brazil) Baosteel (China) China Steel (China) Gerdau (Brazil) Nucor (US) Car-Tech Nippon Steel (Japan) Severstal (Russia) Dofasco Ranking Score 1 131 2 3 4 5 6 7 8 9 10 10 11 129 127 123 121 119 118 116 112 111 111 109 .special company culture." WSD identified 12 companies as World Class Steel Makers. good profitability. and ranked them based on certain factors7 (Refer Table I).
which included cost of raw materials. "Cost-cutting measures are more important in the present situation where one can no longer control steel prices which are dictated by international markets." The consultants suggested TISCO to focus on various components affecting the cost of steel. TISCO appointed McKinsey and Booz-Allen & Hamilton to study its operations and suggest ways to cut costs. TOP was widely regarded.com The 'Top' Program In the early 1990s. cost of conversion. fuel rate in the blast furnace and mining of coal. with minimum investment.(US) TABLE WSD's RANKING I Source: www. required . TISCO implemented TOP program at its G blast furnace8. In the second half of 1998. TISCO was advised to use the most modern technologies to cut costs further. Irani explained the rationale.tatasteel. in association with McKinsey. as a program. which would have a maximum positive impact to the bottomline.
throughput10 and fuel costs were identified as the key performance indicators in the Phase II. which could be reduced were highlighted and the reduction targets were set. In the Phase II of the Wave. By late 1999. The cost elements. The team had to establish relationships between key performance indicators and the elements that had an impact on them. At the G blast furnace. Individual components of the larger cost elements were identified by drawing cost trees9. accounting for more than 10% of its profits in the fiscal 1999. 36 ideas were shortlisted. The unit team's objective was to explore ideas to reduce the cost or delays made by the unit by about 40%. Simultaneously. Each team was asked to set itself a target based on the TOP norms. TOP was in Phase V of the Wave (See Exhibit VI).in minimum time (See Exhibit IV). They accounted for about 50% of the total costs. and implement those ideas. During this phase. The unit leader was responsible for the performance of that particular unit. Considering the techno-economic feasibility. Initially. the team was expected to identify and understand how each cost element could be reduced. Since TISCO's scale of operations was quite large. coke and coal were the largest cost elements. the cost base was examined and the items that had a maximum impact on the bottomline were identified. In the Phase III of the Wave. The Phase IV of the Wave started with the implementation of these ideas. Around eight units were addressed simultaneously during the 12 weeks. ideas were explored to reach the set targets. In the process. TOP enabled TISCO to improve customer satisfaction and loyalty. TOP was expected to enable the TISCO to achieve high rates of performance improvement (See Exhibit V). ideas were generated to achieve the target output of 3800 tons per day. In 2000. similar Waves were also adopted in TISCO's shop floors. Moreover. The Phase I of a Wave was two weeks long. the whole organization was divided into manageable 'units' to facilitate the implementation of TOP. and this was also known as 'Wave. Among the different individual components of fuel costs. McKinsey provided the facilitators. The ideas were then grouped based on the capital expenditure required for implementing each idea. quality and cost in the short term. The team worked full time on the TOP program for a period of 12 weeks. develop ideas to improve from the present level of performance to the target level. A reduction target was set to bring costs down to 570 kgs per thm11 from 610 kgs per thm. It aimed achieving large improvements in throughput. A unit team was formed comprising a unit leader and two facilitators. The TOP program had helped TISCO to shift its focus from just producing volumes to costs and quality. . the G blast furnace also implemented 185 ideas. the G blast furnace achieved a savings of Rs 87 million against the targeted savings of Rs 40 million. which did not require any capital investment.' The entire Wave was divided into five phases (See Exhibit VI). In the long run. By March 1999. TISCO set up a potential savings target for its G blast furnace at about Rs 300 million per annum.
000 employees was not an easy job and the company was able to do it with a lot of communication with employees. and encourage teamwork among the managers and the workforce. TISCO reduced its workforce from 78. It would identify and reward strong performers. The program began with a study on cost-competitiveness. introduce more decision-making flexibility. TISCO used IT as a strategic tool. TISCO wanted to make performance appraisals transparent and fair and reward the good performers. The company made efforts to reduce its product delivery time from 3-4 weeks in 1998 to 2 weeks in 2000. the team decided to use SAP . For example. This exercise was expected to cut the management staff from 4000 to 3000. and after the restructuring. and also offer development opportunities for each employee. Between 1996 and 2000. it planned to promote hardworking young people to higher positions depending on their performance.Implementing Best Practices In 1999-2001. the company formed a small cross-functional in-house team consisting of consultants from Arthur D Little and IBM Global Services. PEP had two core elements. "Youngsters are getting higher salary than some of the seniors. Muthuraman explained the benefits of PEP. under which. The aim of the program was to enhance customer focus enabling better credit control and reduction of stocks. Secondly. TISCO took measures to reduce costs further by adopting innovative strategies and other cost-cutting exercises." In a bid to reduce costs further.000 to 40. TISCO stopped using manganese. In 1999. Through PEP. which was expected to foster growth businesses. Analysts opined that cutting its workforce by 38. Firstly. thereby reducing the costs. clear accountability. After considering several packages.order generation and fulfillment and marketing development. an expensive metal used to increase the strength and flexibility of steel. PEP proposed to introduce a Performance Management System (PMS). TISCO also took steps to reduce its manpower costs. The team was responsible for re-designing two core business processes . TISCO had adopted Performance Ethic Programme (PEP). rather than following the convention of seniority. the average age of the managers has fallen by 10 years. The company also planned to introduce a new compensation package based on performance from November 2001. PMS would also ensure that every employee's job profile was clearly defined.000 employees. it proposed a new organizational structure. The company aimed to further reduce the time to one week. By introducing PMS. TISCO also reduced the hierarchical levels from 13 to 5.
also known as ASSET (Achieve Success through SAP Enabled Transformation) . To develop this business. After SAP solutions were introduced in TISCO. TISCO planned to enter the call center business in Jamshedpur. TISCO entered into a marketing alliance with Tata International. There was a significant reduction in inventory the carrying cost. In contrast. The project was planned in Australia because of the lower power costs.53 billion in 2000-2001. the trading arm of Tata Group. However. the decrease in the production costs enabled TISCO to achieve a profit after tax of Rs 5. TISCO was to get power at a tariff of 1. Critics felt that TISCO might face problems due to the decrease in demand for steel in the global and local markets and increasing competition from cheap imports.R/3. the business processes became more efficient. and Rs 4. TISCO's strategy to export to Jordan. The Future Analysts felt that TISCO's modernization program was very successful.22 billion in 19992000 compared to Rs 2. from Rs 190 per ton in 1999 to Rs 155 per ton by 2000. Iraq and the Southeast Asian countries might reduce dependence on the US markets thus helping the company. They said that its entry into value-added products was expected to safeguard the company from the fluctuations in the steel prices. Power accounted for 60% of the cost of ferro chrome manufacturing. TISCO wanted the team .1 million-ton ferro chrome export oriented project. The Future TISCO was also planning to enter titanium mining through alliances with major global companies. . To provide employment to the employees opting for VRS at over-manned units. There were also significant cost savings through efficient management of resources. The Steel Authority of India Ltd. It also improved customer service and productivity. TISCO also planned to exit from some of its non-core activities.82 billion during 1998-99 (Refer Exhibit VII).to integrate SAP into the existing information system and make it compatible with future SAP implementations. (SAIL) adopted a similar program with an investment of Rs 70 billion. They felt that it was doubtful whether steel. The introduction of SAP also decreased manpower cost from more than US $ 200 per ton in 1998 to about US $ 140 per ton in 2000. However.8 cents for about 15 years that is about onefifth of the tariffs in India. and reduced costs. would deliver returns higher than the cost of capital in India. TISCO planned to enter new areas including setting up of a 0. some analysts remarked that in the long run. even at the lowest cost. and antidumping duties imposed on the domestic steel manufacturers by the US. the program was not successful. in spite of the depressed market and lower margins.
proactive. aggressive. ongoing cost . Do you think the low costs would help the company in the long run? Justify your answer. Apart from TOP. Rs 48 equaled 1 US $. The cost-cutting measures seemed to have helped TISCO to a large extent. hammering. 2. dominant in region. favorable location for procuring raw materials. Jamshedji Nusserwanji Tata (J N Tata) was the founder of the Tata Group of companies. Exhibits Exhibit I: Steel Product Categories Exhibit II: Tisco's Modernization Program Exhibit III: Tisco: Phase V Modernisation Exhibit IV: Total Operational Performance (Top) Program Exhibit V: Top Aims At All-Round Performance Improvement Exhibit VI: Formal Top Process An Overview Exhibit VII: Income Statement 1. despite a depressed market and low margins. balance sheet.Questions for Discussion 1. what are the other steps taken by TISCO for reducing costs? 3. skilled and productive workforce. The lowered production costs enabled TISCO to record a profit during 1999-2000. 6] A renowned industry analyst firm based in the US. TOP was described as "maximum impact to the bottomline. or stretching it at a low temperature (often room temperature). 2] Hot rolled coil is a coil of steel rolled on a hot-strip mill (hot-rolled steel). degree of 'pricing power' with large steel buyers. The ISO 14000 standards are on environmental management. ownership of low-cost ore and coal. in the minimum time. 3] The Integrated steel producers have manufacturing facilities right from the iron ore stage to the finished steel stage. high quality and niche products. 7] Operating costs. 5] In September 2002. Cold rolling is a process where the shape and structure of the steel can be changed by rolling. It can be sold in this form to customers or be processed further into other finished products. borrowed funds and equity on a favorable basis. What was the rationale behind the implementation of TOP? Briefly analyze the process and explain the advantages of TOP. price paid for electricity. with minimum investment. low legacy (retired worker) costs. management is experienced. 4] The International Organization for Standardization (ISO) develops voluntary technical standards.
9] Cost tree is a display of the organization of the costs of a template which contains all the major cost elements for an asset or a worksheet. Visually.cutting efforts. used by integrated steel mills to smelt iron from its ore. it resembles the file arrangement that Microsoft Explorer provides. The cost tree of a master template allows to check or un-check pre-engineered cost elements of the master template. cost position of nearby competitors. . domestic market growth rate. Its name comes from the 'blast' of hot air and gases forced up through the iron ore. 8] A blast furnace is a towering cylinder lined with heat-resistant (refractory) bricks. 11] Kilograms per ton of heavy metal. owns downstream steel-using businesses. coke and limestone that are loaded into the furnace. 10] Output or production over a period of time. proportion of domestic sales.
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